Posted by: Timothy Ellis (The Tim)

Tim Ellis is the founder of Seattle Bubble. His background in engineering and computer / internet technology, a fondness of data-based analysis of problems, and an addiction to spreadsheets all influence his perspective on the Seattle-area real estate market.

83 responses to “Will Higher Interest Rates Kill the Housing Market?”

  1. patient

    Do you think ARMs and teaser rates helped boosting prices during the bubble? Do you think the reduction of those type of low interest rate products contributed to the deflation of the bubble?

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  2. T. Y. Lee

    What was up with the early 80s? And I thought the interest rate on my discover card was bad…

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  3. Pegasus

    Historical rates mean little when you are in a once in a lifetime housing depression. The interest rate is a prime factor in being able to unload most of the existing debt of the housing market on the backs of new buyers that will have lower debt payments than the old owners and thus more credit worthy. Lower rates are having an impact on the housing market at a time when unemployment is at an abnormal high. Raising those rates without a strong economic recovery would have a devastating impact on housing sales and require a dramatic drop in housing values to offset the impact.

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  4. Pegasus

    RE: T. Y. Lee @ 2 – Inflation fighting by the FED. ;^(

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  5. David Losh

    A rise in interest rates won’t be confined to housing. Higher interest rates will destroy many small businesses that are already on the ropes.

    A small business, all business, borrows daily to cover the float. If that float disappears businesses will lay off people, and put off capital expenditures.

    In other words, our economy has crashed since 2004 when we had a much more robust economy. Consumers today also carry debt that will need to be paid off at a higher rate, or many will stop credit purchases.

    You can count a mortgage as consumer debt, because you would stop any appreciation of that asset.

    I’d like to see the chart of consumer debt, private debt, in comparison to the interest rate chart.

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  6. Erik Heiberg

    I don’t think it would “destroy” the housing market, but at the same time I don’t see how it wouldn’t significantly affect it.

    For the majority of the market and potential home buyers, not considering the crème of the crop or top 10-15%, people are really buying a monthly mortgage payment, not necessarily a tangible price of a home.

    As an example, let’s take a $500,000 home. Say a person puts with pristine credit puts down $50,000 as a down payment, at 4% interest rate. This should come out to around a $2,700 a month mortgage payment. Let’s say rates increase in the near future to say 6%. To finance that exact same house, a person would have to be able to afford around a $3,300 a month payment.

    That same home buyer, who is basically still in the same pecking order amongst fellow home buyers, probably isn’t going to magically come up with that $600 difference overnight. So what’s going to give? Will incomes adjust during this same span to cover it, or will that same house, drop 80K in value, so the payment still comes out around $2,700 a month?

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  7. Baughman

    A few years ago I made a comment on the blog, and the consensus was of course increasing interest rates would affect housing prices, because people afford payments, not prices. I agree with that.

    Let’s assume that Joe can afford a monthly payment of $1,432.25 for a 30 year mortgage, 4% apr compounded monthly. This gets him into a 300k mortgage today. What happens if interest rates change?

    aff. mortgage IR
    $300,000.00 4%
    $266,801.08 5%
    $238,886.60 6%
    $215,277.40 7%

    To claim that interest rates could jump up a few percentage points without severely affecting affordability is flat out wrong. (A jump from 4% apr to 6% apr decreases a 300k mortgage by 61k, or 20%). Either that or I’m missing some profound observation here. Are you implicitly assuming that ability to make payments supposed to be correlated with interest payments? Interest rates rise when times (and hence wages) are good? If so, the problem is mitigated very slightly.

    I guess I was too lazy to differentiate between home prices and mortgage here, but my point is still 95% accurate.

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  8. No Name Guy

    RE: Baughman @ 7

    RE: Erik Heiberg @ 6

    You’re both assuming the buyer will keep their expectations (size, features, quality, etc) identical. They won’t. If they can afford 2700 or 1400 and change a month, they’ll buy the house that they can afford.

    If the price of New York steaks goes up consumers look at substituting sirloin, or pork tenderloin, or chicken or simply a smaller portion if they don’t want to switch from the juicy flavor that is a good steak.

    Now, AT THE MARGIN, yes….some potential buyers will simply be priced out, since there won’t be any less expensive alternatives available since they would be buying the very bottom of the market.

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  9. patient

    RE: No Name Guy @ 8
    You conveniently left out the other end, the most important part. When you get fewer buyers in the upper end the price of those homes will need drop down which pushes the mid segment down which in turns pushes the low level down.

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  10. Baughman

    RE: No Name Guy @ 8

    Let’s do some microeconomics 101 stuff.

    Microeconomics is all about income and substitution effects. What happens to Joe’s wealth when interest rates rise? Let’s assume he has no net savings.

    When interest rates rise, Joe is neither poorer nor richer from an income standpoint. His savings are zero, so his expected interest received doesn’t change. No wealth effect. I guess you could argue that Joe pays an interest rates indirectly through rent in the case that he doesn’t own the home. In this scenario, land lords would demand higher rents because their opportunity cost is higher. Let’s call it a wash and assume no income effect.

    What happens when interest rates rise? Items requiring the use of credit effectively become more expensive. At this point, Joe will become less interested in houses/cars, and more interested in steaks, which we assume he can buy without credit. Consumption in general becomes more expensive, given the increased opportunity cost of savings.

    If Joe can buy the home for cash, then he is a net saver. The rise in interest rates will create an increase in wealth for Joe. The substitution effect is a moot point because the cost of credit is irrelevant to him (though I guess it still represents an increased opportunity cost to his savings). The income effect is dwarfed. Home prices rise.

    If Joe were a net debtor, then certainly there is no way for the income effect to dominate the substitution effect.

    The question we have to ask ourselves is whether there are more Joe the debtors or Joe the cash hoarders participating in the housing market. I like the standpoint that there are a bunch of Joes with zero non-retirement net worth out there. With many, many, many people underwater in their homes, it doesn’t take a huge imagination to think of this. In which case, there is no income effect; substitution effect says housing prices decrease.

    Substitution effect says that renting becomes better when interest rates rise (assuming interest rates not passed to Joe). It also says tastes in housing ownership change, and crappier houses are disproportionately demanded, creating some alleviation from prices on the high end.

    I think I’m too lazy to read through this and catch any mistakes, so sorry.

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  11. Erik Heiberg

    RE: No Name Guy @ 8

    I think your points holds some validity, but overall, I don’t really agree and here’s why. Perhaps this is just a naive way of looking at things, with some flaws, but overall, I think the basic concepts still apply.

    Let’s say the current market (~4% fixed interest rate) yields the following matchup of buyers to sellers.

    B:A -> S:A (HIGH)
    B:B -> S:B
    B:C -> S:C
    B:D -> S:D
    B:E -> S:E
    B:F -> S:F
    B:G -> S:G
    B:H -> S:H
    B:I -> S:I
    B:J -> S:J (LOW)

    So, if I follow you correctly, and if interest rates of say ~6% force buyers to change their expectations on what they can afford, you may get something that looks like this:

    no eligible or willing buyer -> S:A
    no eligible or willing buyer -> S:B
    no eligible or willing buyer -> S:C
    B:A -> S:D (HIGH)
    B:B -> S:E
    B:C -> S:F
    B:D -> S:G
    B:E -> S:H
    B:F -> S:I
    B:G -> S:J (LOW)
    B:H -> priced out of market
    B:I -> priced out of market
    B:J -> priced out of market

    It seems to me, the higher end homes in this market would be competing for an evaporating group of buyers, which would in turn, drives home prices down. That is unless, these high end sellers are content with being stuck, and not being able to sell. Not really sure these are the type of homes that are suitable to renting either.

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  12. StillRenting

    By patient @ 9:

    RE: No Name Guy @ 8
    You conveniently left out the other end, the most important part. When you get fewer buyers in the upper end the price of those homes will need drop down which pushes the mid segment down which in turns pushes the low level down.

    This is what I was thinking. If everybody who finances has to adjust their expectations for what they can afford downward, that means the demand for properties at the upper pricing tiers will decrease, which should eventually drive prices down throughout all tiers. It may take a while, but I think it would eventually happen.

    The thing to look at would be the historical trend of interest rates vs. price per square foot (the closest approximation to “how much house you can buy” at any given interest rate). I’m sure TIm has done this chart somewhere, but I haven’t looked to find one.

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  13. ARDELL

    Generally you end up with a borrowed from future purchases type market like we saw during the tax credit. As rates start to rise people get into that “buy now or be priced out forever” mood and so the beginning of the rate increase improves the market. Next year’s would be buyers buy this year instead. So by the time the rate is at it’s highest, people have already bought in advance of the time they normally would have. Demand reduces accordingly. Still back to supply and demand being the key factor for prices. If rates go from 3.875% to even 4.5%, a lot of people will jump in for fear they will be on the sidelines while rates go to 7%.

    To some extent the multiple offers of a couple of weeks ago had to do with rates increasing just a tad. Fear of higher rates can greatly improve a current market temporarily during small upward blips of interest rate.

    Long term the increased rate would have zero impact, and I doubt you will see rates at higher than 5.875% anytime in the next 5 years.

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  14. patient

    RE: ARDELL @ 13
    Why not 5.876?

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  15. Scotsman

    Interest rates won’t be going up. If interest rates did rise the governments of Japan, most of western Europe, and the U.S. would have only two choices- unsterilized printing or default, both of which ultimately lead to a collapse of the current pricing structures we now recognize. Those in control simply won’t allow a significant increase in rates as it would imperil existing wealth distributions and power structures. We will muddle, for a year or for decades, but there won’t be any rapid or significant increase in rates.

    Thirty years ago the U.S. and much of the rest of the industrialized world came to a fork in the road and went left. At the time it looked easier than the alternative, but it turned out to be a trap. After 30 years of falling rates and the ever easier monetization they brought we have almost reached the bottom of the hill and a dead end. Unfortunately, no one has the economic strength or will to turn around and hike back up the long hill to economic sustainability.

    Somewhere in the past we forgot that borrowed money isn’t the same as income, but we’ve treated it that way, both as a country and as individuals. And as interest rates have fallen borrowing has gotten ever cheaper, so we have borrowed ever more and thoughtlessly “invested” it in non-productive junk.

    When rates are zero, as they may ultimately be, you can “borrow” all the money you’ll ever need at no cost, with no consequences. How absurb is that? Yet that is exactly where we are headed. Rates will fall- because there is no real market- it’s all manipulated. Home prices will continue to recover, at least in nominal terms, so that people (the sheep) will feel better about themselves, the government, and the future. That is until it all collapses into a black hole.

    Feel free to buy now, but be sure to either own it outright or sell and get out before the reckoning comes.

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  16. Publius Scipiano

    Markets are made or broken by the Government depending on the necessity.

    Money needs to be released from real estate to be used for jobs, growth.

    Hence housing will be broken.

    It doesn’t have to “Make Sense” based on the past.

    We are not building railroads much any more are we?

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  17. ARDELL

    RE: patient @ 14

    Because mortgage rates run in 1/8th increments. The number after 5.875% would be 6% and never 5.876%. In between pricing is adjusted in cost and not rate. The APR (rate plus costs) will be expressed in odd numbers, but rate is always expressed in 1/8th increments.

    Right now they are at 3.875% and when they go “up” they go to 4% and not in between. Next stop is 4.125%. In recent history, as in the last 30 to 45 days, I have not seen them lower than 3.75% or higher than 4.125% unless someone is trading in a credit.

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  18. phil

    What Ardell said, plus…

    I realize everyone has now gotten used to housing prices going down, but in the future they will be going up again. As interest rates go up, that will act as a break on housing prices.

    Interest rates going up is also a sign of wage inflation, that the Feds want to slow the economy (happening in China now). That also means more money in the pockets of potential buyers. So in the end it is probably a wash.

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  19. Scotsman

    RE: Scotsman @ 15

    Debt, financed at ever falling rates, has been used to make up the difference in falling incomes. We will not recognize all of the drop in standard of living until the debt is cleared and we are once again forced to live within our means on a cash flow basis. Gonna be a shock for so many:

    “Using the year 2000 as the numerical base from which to “zero” all of the numbers, real wages peaked in 1970 at around $20/hour. Today the average worker makes $8.50/hour — more than 57% less than in 1970. And since the average wage directly determines the standard of living of our society, we can see that the average standard of living in the U.S. has plummeted by over 57% over a span of 40 years.”

    http://www.thestreet.com/story/11480568/1/us-standard-of-living-has-fallen-more-than-50-opinion.html

    Time to go back to hiking, boating, and loving. Later.

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  20. Nick

    @Tim, I totally agree. In fact, I’d be surprised if rates do go up in the next few years, beyond a nominal fluctuation. Rates are based on the Fed rate (roughly), and the Fed won’t increase its rate for a while.

    Also agree with Scotsman @15, at least in the short term.

    If/when rates do go up, housing prices will simply adjust (downward) to compensate, as they usually do in response to rate changes. Also, that’s the one plausible argument for housing prices being currently near the bottom, IMHO: nominal prices are still high, but factoring in the absurdly low interest rates, the effective prices may be closer to the bottom than nominal price changes would suggest. That doesn’t mean it’s a good time to buy, of course (you can change the rate of a loan, not the principle amount), but it’s interesting.

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  21. deejayoh

    This ground has been covered here before and the facts are still the same
    http://seattlebubble.com/blog/2010/02/09/do-rising-interest-rates-lead-to-falling-home-prices/

    There is no statistical relationship to suggest that interest rates and home prices are negatively correlated. There’s plenty of data over a 70 or so year period that suggests that there is almost no correlation

    http://economix.blogs.nytimes.com/2010/09/07/mortgage-rates-and-home-prices/
    http://www.calculatedriskblog.com/2010/09/mortgage-rates-and-home-prices.html

    Do car prices fall when interest rates are high?

    And no, it’s not “different this time” any more than it was on the way up.

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  22. Blurtman

    RE: Scotsman @ 15 – It’s about time the USG enacts negative interest rates to punish all of those selfish savers. Hey, felllow ‘Mericans, the US government, a subsidiary of Wall Street, urgently requests your dollars now.

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  23. patient

    The reason there has been no major impact on the housing market from historic interest rate changes is that interest rates and inflation has gone hand in hand. I.e if you get more money while the Borrowing cost is going up it’s a wash and no major impact. However if you have large swings in interest rates when inflation stays the same or move in the opposite direction the impact will be major. This is what can happen now due to the FEDs manipulation to drive rates down. If the FED stops or reduces the manipulation before significant income inflation takes hold there will be a blow to housing. Count on it.

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  24. patient

    Likewise if income inflation was rampant and mortgage rates where cut in half you would launch a bubble. It’s just common sense.

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  25. deejayoh

    By patient @ 24:

    Likewise if income inflation was rampant and mortgage rates where cut in half you would launch a bubble. It’s just common sense.

    except that interest rates where higher all through the bubble than they were in the crash. So your premise is wrong for the last 4-5 years. How is that common sense?

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  26. patient

    RE: deejayoh @ 25
    Easy. ARMs and teaser rates substituted for 30 year fixed.

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  27. patient

    I’m quite baffled. Have you guys already forgotten the bubble? Pretty scary.

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  28. Scotsman

    RE: Blurtman @ 22

    Agreed- but you have to wonder how smart are these guys, really? Like tobacco companies eventually killing their customers, is WS going to end up putting themselves at risk as the political and legal structures they rely on fall apart? I think we’ll find they over-reached and now “can’t find their way home.”

    http://www.youtube.com/watch?v=VT-SFgkVlno&feature=related

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  29. Scotsman

    RE: patient @ 27

    It’s a new game, with new rules. Change your assumptions, change the outcome.

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  30. patient

    RE: Scotsman @ 29
    There is no free lunch. Sooner or later there are consequences to actions. That never changes.

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  31. David Losh

    RE: deejayoh @ 21

    The graph you linked to show a defined correlation between interest rates and the Real Estate market up to that big spike that we call the bubble. There was nothing normal about that spike so, yes, this time it is different.

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  32. Blurtman

    RE: Scotsman @ 28 – Thanks for the link. Derek Trucks, as well, paying homage to the masters. Blind Faith, the great, momentary super group. Good stuff!

    I think perhaps this Windwood/Traffic classic may also apply as an ode to Bernanke, perhaps: http://www.youtube.com/watch?v=SvT_f_lVyNQ

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  33. Blake

    Luckily, since the outlook for us is similar to Japan in the 90s, it’s not likely that interest rates will go up anytime soon.

    Unluckily, the outlook for us is similar to Japan in the 90s…
    Perhaps in the next downturn/crash helicopter Ben Bernanke will finally be able to fly around dumping money on people to encourage spending. That’ll be fun to watch!

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  34. Disappointed buyer

    By Baughman @ 7:

    A few years ago I made a comment on the blog, and the consensus was of course increasing interest rates would affect housing prices, because people afford payments, not prices. I agree with that.

    Let’s assume that Joe can afford a monthly payment of $1,432.25 for a 30 year mortgage, 4% apr compounded monthly. This gets him into a 300k mortgage today. What happens if interest rates change?

    aff. mortgage IR
    $300,000.00 4%
    $266,801.08 5%
    $238,886.60 6%
    $215,277.40 7%

    To claim that interest rates could jump up a few percentage points without severely affecting affordability is flat out wrong. (A jump from 4% apr to 6% apr decreases a 300k mortgage by 61k, or 20%). Either that or I’m missing some profound observation here. Are you implicitly assuming that ability to make payments supposed to be correlated with interest payments? Interest rates rise when times (and hence wages) are good? If so, the problem is mitigated very slightly.

    I guess I was too lazy to differentiate between home prices and mortgage here, but my point is still 95% accurate.

    That would be me, we just got a house at your top tear, if rates had risin we would have droped our shopping price. Yeah property taxes will Change my payment yearly but with a 3.75 30 year I have room for adjustments in property taxes. I need to change my name on here to “happy long term buyer”

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  35. Kary L. Krismer

    By patient @ 23:

    The reason there has been no major impact on the housing market from historic interest rate changes is that interest rates and inflation has gone hand in hand. I.e if you get more money while the Borrowing cost is going up it’s a wash and no major impact. However if you have large swings in interest rates when inflation stays the same or move in the opposite direction the impact will be major. This is what can happen now due to the FEDs manipulation to drive rates down. If the FED stops or reduces the manipulation before significant income inflation takes hold there will be a blow to housing. Count on it.

    Very good. Sad though that it took 23 posts for someone to mention the correlation between higher interest and higher inflation, and the impact that would have on the price of housing. I do agree though that a wild swing in interest rates could have the impact you say.

    BTW, I would again point out that FHA loans are assumable, and that a large part of the market right now is FHA. Those people will not be affected as badly.

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  36. Scotsman

    RE: Kary L. Krismer @ 35

    “the correlation between higher interest and higher inflation”

    I would assert that this relationship has been broken and is not likely to be re-established anytime soon.

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  37. Jonness

    You can perhaps understand why I am skeptical when I hear claims that a point or two increase from today’s sub-4% interest rates is somehow going to destroy the housing market.

    Perhaps you haven’t considered the possibility the only reason any of the overpriced crap currently on the market is moving at all (albeit extremely slowly), is because of the attraction to historically low rates. What happens when the same house costs an extra $500/mo. just because rates increased? The rate of sales increases as does the sold price? No. That can’t happen unless there is an accompanying wage spiral.

    Also, I’m not sure why people are so surprised by these low rates. Myself and others felt back in 2007/2008 that the U.S. was headed full steam ahead toward a Japan-like liquidity trap.

    Remember those days? That was back when all these supposed RE experts were screaming about low rates and warning people they better buy now or miss the low rate environment.

    I people want to know what’s going on, they need to disregard the advice and outlook of absolutely everybody who is in any way making money of the sale of RE. 99% of these people haven’t got the faintest clue as to what’s going on and will continually pump the market no matter what the real outlook is.

    There is no hurry. The low supply is a sign of a bursting housing bubble continuing it’s way down. I first read of this symptom in a genius’s blog back in 2005. He outlined absolutely everything that would occur, and the low supply was no exception. For those that don’t understand the nature of bubbles, the low supply seems like market strength. Nothing could be further from the truth. It is a shining example of market weakness when taken together with the rest of the signs and symptoms.

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  38. David Losh

    RE: phil @ 18

    You brought up wage inflation, and mentioned China. It’s true that workers in China now make between $2 to $5 per day rather than $1. China, the government, the banking system, are building like crazy using billions, and maybe trillions of yuan that keep pumping through the economy. China can’t stop, if they stop the economy collapses.

    China is a communist country so everything is kind of under control. They have a strong military that also adds billions to the economy. The military they have is also in country rather than fighting a foriegn war that is soon to slow down, and stop.

    I don’t see wage earners getting raises, except for the contracts they sign every three, five, and seven years. Unions used to be a good source of wage inflation, but they are getting the snot beat out of them lately.

    Doctors, and engineers are on contracts that are renegotiated. I’ll bet, and let’s get a show of hands, that most contract workers aren’t in the strongest negotiating position.

    The economy may be great, but I know people are looking for work, and employers are pretty choosey today. Employers hire fewer people and productivity goes up.

    So I would like to know where this wage inflation may come from?

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  39. Jonness

    By Pegasus @ 3:

    Historical rates mean little when you are in a once in a lifetime housing depression. The interest rate is a prime factor in being able to unload most of the existing debt of the housing market on the backs of new buyers that will have lower debt payments than the old owners and thus more credit worthy. Lower rates are having an impact on the housing market at a time when unemployment is at an abnormal high. Raising those rates without a strong economic recovery would have a devastating impact on housing sales and require a dramatic drop in housing values to offset the impact.

    Correct! But why is it so difficult for so many people to understand? Stimulation is not a one-way street. You turn it on, and you stimulate. You turn it off, and you depress.

    Bernanke bought 61% of government debt in 2011 in an attempt to force rates low and stimulate the economy. Do people really believe there would be no effect if he stopped printing money and allowed rates to float up? To put it politely, that’s naive.

    So what happens when Bernanke forces rates to historically low levels, and the economy still does not catch fire? Well, you get a chart just like the one in Tim’s post, where rates go to unbelievable lows and stay there, or even get unbelievably lower. It’s called a liquidity trap (ala multi-decade falling house prices in Japan).

    Once (short term) rates go to zero, you can’t lower them any more. So if rates hit zero, and the economy doesn’t catch fire, and you can’t lower rates any more, how do you get the economy moving? Well, you can recapitalize the banks in order that they will lend lots of money to regular people on mainstreet. That will cause inflation, right?

    No it won’t. Because the banks will just hold onto the money and refuse to lend it out until they work through their toxic mortgage mess that’s hidden away by not being marked to market.

    In short, we are stuck in a quagmire praying for a miracle to occur.

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  40. Jonness

    By deejayoh @ 25:

    By patient @ 24:
    Likewise if income inflation was rampant and mortgage rates where cut in half you would launch a bubble. It’s just common sense.

    except that interest rates where higher all through the bubble than they were in the crash. So your premise is wrong for the last 4-5 years. How is that common sense?

    As patient eluded to, we quite obviously were in a rampant income inflation environment with an accompanying falling mortgage rate environment. As he correctly pointed out, that’s a recipe for a bubble (and a bubble we did get).

    Now you come along and point out that mortgage rates have been falling for the last 4-5 years; thus, patient is wrong. Yet, you forgot to consider that we are currently missing the rampant income inflation component to patient’s claim.

    Baking soda and vinegar cause a violent reaction in combination, but one or the other has little to no effect.

    The Fed has the power to print, lend, purchase, and set rates. Setting rates lower is one of the best economic stimulus tools in its arsenal. But even it is not enough to offset the excesses of a massive housing bubble. As cheap as rates are, people are still sitting on the sidelines. It’s a classic case of a liquidity trap. It’s not like Bernanke can force rates appreciably lower in order to get velocity flowing again, thus favorably affecting MV=QP. And he can’t increase M either, because M=MB/R.

    We’ve spent the last 5 years stuck in a quagmire praying for a miracle to occur. If only the doubters could explain where all the money is going to come from that will change this hopeless situation.

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  41. Andy

    Similiar discussion going on here (includes graphs):

    http://patrick.net/forum/?p=1211412

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  42. Scotsman

    RE: Jonness @ 40RE: Jonness @ 39

    “In short, we are stuck in a quagmire praying for a miracle to occur.”

    Oh come on. We’re dead. You know it, I know it, others are ever so slowly starting to catch on. I would quibble with your assertion that some are praying for a miracle. Those in the know with the power to do something aren’t even having a discussion. NO ONE is talking about real solutions because the transitory economic pain will/would be too great. All of the solutions are politically impossible. In fact, it often appears those in controll have decided to add fuel to the fire in an effort to hasten the inevitable. More power to them. Let’s get it over with and move on.

    Nothing changes until the checks bounce.

    http://market-ticker.org/uploads/2010/Mar/Diminishing-Prod.jpg

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  43. Scotsman

    RE: Andy @ 41

    I like and read Patrick.net but the level of analysis is often not really up to speed. Even here the analysis is too often over-simplified and incomplete. There are a lot of factors besides interest rates that impact home prices. And in the macro environment there is a whole new set of rules that pretty much void historical trends and relationships.

    Here’s one chart that disputes many of the assumptions discussed above- and that is before we get to any discussions re: growing debt loads, Fed policy, derivatives, etc. Two variables- interest rates and home prices- don’t begin to capture the complex and changing nature of our economic environment.

    Like dejayoh says- there’s no clear relationship:

    http://patrick.net/forum/content/uploads/2012/04/home-prices.GIF

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  44. patient

    RE: The Tim @ 44
    Not at all if you factor in that we also had the highest inflation in modern history during that time. It’s the spending power that matters not interest rates alone. The last years spending power has eroded due to job losses, stagnant salaries and high energy prices. Falling interest rates in this is the norm but now we also have the significantly manipulating ratesceven lower. If they stop before general increases housing will be hurt.

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  45. patient

    Some corrections to the above:
    Falling interest rates in this environment is the norm.
    we also have the FED significantly manipulating rates even lower.

    ( Of some reason I temporarily lost the edit function )

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  46. Disappointed Buyer

    tim not that i have the right to get onto anyone for a typo but shouldn’t it be
    “yearly convention mortgage rates”

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  47. Disappointed Buyer

    Just for fun I put in the rate for 1982 in a morgage caculator for the aount of my new lone WOW! thank tim i feel really lucky now.

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  48. Kary L. Krismer

    By Scotsman @ 36:

    RE: Kary L. Krismer @ 35

    “the correlation between higher interest and higher inflation”

    I would assert that this relationship has been broken and is not likely to be re-established anytime soon.

    Extremely doubtful.

    First, no one is going to loan you money long term at 4% when inflation is running at 8%.

    Second, don’t confuse price increases caused by a commodity price increase with inflation.

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  49. Kary L. Krismer

    By Jonness @ 37:

    You can perhaps understand why I am skeptical when I hear claims that a point or two increase from today�s sub-4% interest rates is somehow going to destroy the housing market.

    Perhaps you haven’t considered the possibility the only reason any of the overpriced crap currently on the market is moving at all (albeit extremely slowly), is because of the attraction to historically low rates.

    If your view of the world is based on false assumptions, you reach the wrong conclusion.

    Low interest rates certainly help, but that is hardly the only reason houses are selling. In case you haven’t noticed, some houses can be bought for roughly half what they used to cost during a period when interest rates were higher. That has an impact. Also, given the fact that the productive time of an adult is less than 50 years, many have already waited more than 1/10th of their productive life to buy, and are tired of waiting. Others are just now coming into the time of their life when they would buy irregardless of the fact prices have made that more affordable.

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  50. David Losh

    RE: The Tim @ 44

    You had your choice of properties at that time. Prices didn’t plummet because it was an inflationary time. What you paid for choice properties however was a bargain. Banks wanted to lend money at those rates, buyers bought rates down, did seller financing. What most people knew is that the price of property was going up so they had the possibility to refinance in the future, or sell.

    We’re in a time when prices are falling.

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  51. softwarengineer

    RE: phil @ 18

    What Seattle Housing Market?

    The sales rates and inventory are so pathetic today compared to 5-6 years ago, projecting up or down in price lacks credible historical backed mathematical data.

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  52. Kary L. Krismer

    By softwarengineer @ 52:

    The sales rates and inventory are so pathetic today compared to 5-6 years ago,

    I don’t know that comparing volume numbers to a bubble period means much, or that you want to reach that level again.

    http://seattlebubble.com/blog/wp-content/uploads/2012/04/KingCoSFHClosed2012-03.png

    With that in mind, sales volume obviously isn’t great. I just wouldn’t use the term pathetic.

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  53. ARDELL

    The going rate has been 3.875% for some time now. Let’s define ” higher” and “kill” from the post Title.

    At 5%, resale home ads will say “3.875% assumable mortgage” for anyone who has been buying via an FHA loan, and later is selling during a 5% market. Those properties will maintain price better than some others.

    Builders will offer a bought down rate that will hold prices up. The profit will be lower, but only to the extent of the cost of the buy down.

    The third market segment, those trying to sell who have conventional and not assumable mortgages, will be in between and offering less of a buy down than the builders. Usually the cost of a buy down is cheaper than a price reduction.

    David is correct that there will be a 4th segment of seller financing, but usually that is a tiny portion of the market for buyers who don’t qualify. Seller financing is not the answer to higher rates as much as a seller paying extra points to buy down the rate.

    There will be another group of sellers who refuse to lower price or buy down the rate, but those homes will simply be the catalyst for the others that sell based on comparison.

    The prices in the charts don’t tell the story of the increased cost of selling needed to maintain home prices. Lenders can maintain home prices by decreasing the cost of the rate buy down, grabbing more up front cash in extra buy down points from sellers and buyers both.

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  54. Kary L. Krismer

    By ARDELL @ 54:

    David is correct that there will be a 4th segment of seller financing, but usually that is a tiny portion of the market for buyers who don’t qualify. Seller financing is not the answer to higher rates as much as a seller paying extra points to buy down the rate..

    Seller financing is going to be a very small segment of the market due to due on sale clauses. Even if banks currently might not be enforcing those, it would be very risky to ignore such clauses. Not to mention there are practical considerations like making the payments on the existing mortgage, getting the mortgage interest deduction, etc.

    I’ve mentioned this before, but there are some agents involved in some sort of a scam where they “sell” properties based on unrecorded purchase and sale agreements. I suspect they’ll discover that’s a licensing violation at some point.

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  55. ARDELL

    RE: Kary L. Krismer @ 55

    Kary…seller financing means they own the home they are selling free and clear, hence the small market segment. You are talking about wrap mortgages.

    Seller financing can be a small 2nd if disclosed and acceptable to the 1st, but never is the seller “financing” any portion he does not own free and clear.

    You are jumping to the dark side…

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  56. Kary L. Krismer

    RE: ARDELL @ 56 – Seller financing can mean many things and can take many forms, and in no way implies that the owner owns free and clear. You described a few of those forms. I raised an issue with one of them (and it wouldn’t necessarily be a wrap).

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  57. Scotsman

    RE: Kary L. Krismer @ 49

    “Extremely doubtful”

    It’s happening now. Stick to law.

    Current CPI at 3% plus standard 2% administrative cost means your 3+7/8 30 year sells at a loss. Using the old method of calculating CPI (prior to .gov changes due to increasing costs and escalation clauses) CPI is 6% plus 2%- your 8%- but still on the market at 3+7/8.

    http://www.shadowstats.com/alternate_data/inflation-charts

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  58. Kary L. Krismer

    RE: Scotsman @ 58 – So taking the inflation rate and adding a plug number to it is the same as saying that you won’t be able to get a 4% loan when inflation is 8%?

    But yes, if you change what I said, then it’s not true. And if you change what you said originally, it is true. /sarc

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  59. ARDELL

    RE: Kary L. Krismer @ 57

    Well if you are going to include illegal means of propping up home prices (which I would not) you might as well cover the most notable, a silent second, as well as putting a gun to someone’s head.

    Let’s stick to methods of dealing with higher interest rates that can be used to advertise the home in public remarks

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  60. Kary L. Krismer

    RE: ARDELL @ 60 – I guess mentioning one method I clearly did not recommend and another which I described as a likely licensing violation wasn’t clear enough. /sarc

    And again, the point I was making, as evidenced by the first sentence, was that due on sale clauses would limit it. Thus, the point was that most of these would need to be on properties that are free and clear (except FHA, which was a point I made elsewhere).

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  61. patient

    Tim, you are a strong believer that affordability determines the direction of prices. You even base your bottom call on it. And why not, it makes a lot of sense and in the long run when psychology with periods of fear and euforia are not present you are correct, it is what matters.

    So how come you can’t see that the interest rate is a main component of affordability? It should be obvious. Is it the lack of historic correlation that tricks you to fail to see the obvious?

    There are only two ways to increase affordability. Increase wealth or decrease cost. Lower interest rate decreases cost. A tax credit increases wealth. Same result, increased affordability.

    The FED is stimulating the housing market by lowering the cost of borrowing by buying long term treasuries and mortgage backed securities. If they remove that stimulus and let rates increase without an offsetting increase in wealth affordability goes down. And if you are a believer in affordabilty the result should be obvious to you.

    So a rise in interest rates will cool the market if there isn’t a rise in general wealth from a strong increase in employment, salaries, investments and debt reduction. It’s a balance and right now the FED is manipulating it. If they can keep doing so until wealth increase is covering for it you will not see a negative impact on prices. However this interference has a cost, financially and politically so we’ll see how it will play out.

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  62. patient

    RE: The Tim @ 63 – I’m not sure your affordability is based on overall wealth or income of the people who has a job? Overall public wealth needs to include unemployment, investments, savings, debt load for all residents. On top of that you need to offset the psychology of fear of job loss, falling prices and so on so affordability needs to be way higher than normal in this environment to spark buyers. The interest rate manipulation now might have reached this level.

    Reasonable affordability levels is not good enough in this environment as you have proof of from 2009 until now. You need to put it in context and adapt to what you can see yourself in your graph.

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  63. Doug

    “It would not surprise me one bit if rates stay in the threes and fours for at least a few more years.”

    I’m counting on it! I hope to refi to a 20-year in about 18 months.

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  64. David Losh

    RE: The Tim @ 63

    “Meanwhile, incomes have been and are still rising,”

    That doesn’t take into account unemployments, or productivity per employee. Also the big money wage earners seem to be contract employees, or independent contractors.

    I agree with patient at #64, and have through out this thread.

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  65. Sam

    RE: Jonness @ 37
    Would be greatly educational if you can find and post the link to the blog.

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  66. Jonness

    By Kary L. Krismer @ 50:

    If your view of the world is based on false assumptions, you reach the wrong conclusion.

    I agree with that.

    Low interest rates certainly help, but that is hardly the only reason houses are selling.

    And you are making a false assumption that houses are selling at a healthy enough rate to marginalize the effect of historically low interest rates. The charts tell a different story.

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  67. deejayoh

    By patient @ 26:

    RE: deejayoh @ 25
    Easy. ARMs and teaser rates substituted for 30 year fixed.

    What teaser rates and ARMS were available in the last 4-5 years? Easy if you don’t address my point, I guess.

    Interest rates have been at historical lows and prices crashed, yet somehow – prices are supposed to be very sensitive to interest rates. They aren’t. You can theorize all you want, but 70 years of historical data shows this to be true.

    your theory works, except when it doesn’t.

    And by the way, the bubble was driven much more by relaxation of paperwork standards and mortgage qualifications than it was by low interest rates. Marginal borrowers were paying outrageous mortgage rates. Relaxed lending standards and low interest rates are not the same thing. You can have one without the other, and you are lumping the two together as if they are the same issue.

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  68. Jonness

    By Sam @ 67:

    RE: Jonness @ 37
    Would be greatly educational if you can find and post the link to the blog.

    I’ve linked it a couple of times in the past. Sorry, I’ve lost track of the link since then.

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  69. Jonness

    By The Tim @ 63:

    I do see that the interest rate is a large component of affordability. The thing is, affordability is at record highs right now due to the absurdly low interest rate. If rates went up to 6% overnight (which they won’t) we would still be at a relatively normal, sustainable level of affordability:

    I call BS. Affordability is at record levels; yet, sales are in the toilet. Now raise rates by 2%, and supposedly it won’t have an adverse effect on sales?

    IMO, you’ve been chatting up too many RE agents who believe that all RE sales are purely a local phenomenon. If that were even remotely true, the going rate for a 30-year fixed would be WAY above the current 3.85%.

    Macroeconomic factors are the main component of what’s currently occurring in your local housing market. If you ignore the main purpose of the Fed and it’s main economic weapons, of course it seems like interest rates have little to do with the price and quantity of goods sold. But that kind of thinking purely defies economic reason.

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  70. patient

    RE: deejayoh @ 69
    As usual you are picking on technicalities and totally missing the big picture. I can’t recall you ever being right about anything, sorry.

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  71. deejayoh

    By David Losh @ 31:

    RE: deejayoh @ 21

    The graph you linked to show a defined correlation between interest rates and the Real Estate market up to that big spike that we call the bubble. There was nothing normal about that spike so, yes, this time it is different.

    Are we both talking about this chart?

    http://imageshack.us/photo/my-images/593/07economixleonhardtchar.jpg/

    Are we both talking about the same statistical concept of correlation?

    WTF?

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  72. deejayoh

    By patient @ 72:

    RE: deejayoh @ 69
    As usual you are picking on technicalities and totally missing the big picture. I can’t recall you ever being right about anything, sorry.

    Referring to a different period than I cited is not a “technicality”, in my book

    And I did not, and do not insult you as you have me.

    I like to think that we can engage in civil discourse on this blog and have reasoned arguments.

    But there is nothing “patient” about your approach. You really should change your screen name

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  73. Jonness

    People need to be extremely careful with their interpretation of “affordability.” It does not mean “inexpensive.” If you get those two terms confused for one another, you are going to burn in heII. “Affordable” means, people who don’t have any money and who will never have any money can get cheap loans in exchange for paying a much higher price for the asset. Thus, in the context of Tim’s chart on affordability, affordable and expensive are equivalent terms. Tim should change his chart to “The Expensiveness Chart” in order to show just how expensive that overpriced junk out there really is.

    http://www.ritholtz.com/blog/wp-content/uploads/2011/04/2011-Case-SHiller-updated.png

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  74. patient

    RE: deejayoh @ 74
    Ok, sorry if I lost patience and insulted you. It was unnecessary so here is another attempt to clarify what I meant. You said i was wrong since interest were higher during the bubble than the last couple of year. My answer to that is that the fixed rates were but hardly no one used them. People used ARMs and teaser rates which meant lower initial payments than the falling fixed rates of the bubble aftermath. This to me strengthens my argument and I thought that was clear to a guy like you and you were just being a donkey about the technicality that I left out parts of the explanation.

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  75. Kary L. Krismer

    By Jonness @ 71:

    IMO, you’ve been chatting up too many RE agents who believe that all RE sales are purely a local phenomenon. If that were even remotely true, the going rate for a 30-year fixed would be WAY above the current 3.85%..

    I agree with you that real estate prices are affected by national events. National events are what brought our market down.

    But I don’t agree with you on the interest rate argument. The reason you don’t see higher interest rates locally is that with Freddie and Fannie out there, interest rates are national. You’re not going to have banks in one part of the country charging a lot more for a loan than in other parts, because the supply of money is national. The market is national.

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  76. Kary L. Krismer

    By deejayoh @ 73:

    By David Losh @ 31:
    RE: deejayoh @ 21

    The graph you linked to show a defined correlation between interest rates and the Real Estate market up to that big spike that we call the bubble. There was nothing normal about that spike so, yes, this time it is different.

    Are we both talking about this chart?

    http://imageshack.us/photo/my-images/593/07economixleonhardtchar.jpg/

    Are we both talking about the same statistical concept of correlation?

    WTF?

    I will again point out that during the high rate periods of the 70s and 80s buyers could buy “subject to” an existing mortgage, and that blunted the effect of the interest rate increases.

    If interest rates did skyrocket, Congress could help the market simply by repealing the Garn act, which made due on sale clauses enforceable in Washington and many other states, by overriding state law.

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  77. Kary L. Krismer

    By Jonness @ 75:

    People need to be extremely careful with their interpretation of “affordability.” It does not mean “inexpensive.” If you get those two terms confused for one another, you are going to burn in heII. “Affordable” means, people who don’t have any money and who will never have any money can get cheap loans in exchange for paying a much higher price for the asset. Thus, in the context of Tim’s chart on affordability, affordable and expensive are equivalent terms. Tim should change his chart to “The Expensiveness Chart” in order to show just how expensive that overpriced junk out there really is.

    If you had made as much money in the past 5 years as what you claim, you wouldn’t be talking like that. Housing prices would be insignificant to you.

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  78. deejayoh

    By patient @ 76:

    RE: deejayoh @ 74
    Ok, sorry if I lost patience and insulted you. It was unnecessary so here is another attempt to clarify what I meant. You said i was wrong since interest were higher during the bubble than the last couple of year. My answer to that is that the fixed rates were but hardly no one used them. People used ARMs and teaser rates which meant lower initial payments than the falling fixed rates of the bubble aftermath. This to me strengthens my argument and I thought that was clear to a guy like you and you were just being a donkey about the technicality that I left out parts of the explanation.

    Now I am just a donkey. Thanks. I feel much better now.

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  79. David Losh

    RE: deejayoh @ 73

    This is the link you referred to http://economix.blogs.nytimes.com/2010/09/07/mortgage-rates-and-home-prices/ and there is a spike at the end of the graph.

    You also referenced anothe post Tim made where you made the same assertions, that were discussed, and I thought the discussion refuted what you were saying.

    That thread fell into a conspiracy theory, but the main points were the same.

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  80. Macro Investor

    By Scotsman @ 42:

    RE: Jonness @ 40RE: Jonness @ 39

    “In short, we are stuck in a quagmire praying for a miracle to occur.”

    Oh come on. We’re dead. You know it, I know it, others are ever so slowly starting to catch on. I would quibble with your assertion that some are praying for a miracle. Those in the know with the power to do something aren’t even having a discussion. NO ONE is talking about real solutions because the transitory economic pain will/would be too great. All of the solutions are politically impossible. In fact, it often appears those in controll have decided to add fuel to the fire in an effort to hasten the inevitable. More power to them. Let’s get it over with and move on.

    Liquidity trap and Japan-like quagmire, indeed. One thing nobody’s mentioned is CREDIT AVAILABILITY.

    Helicopter Ben at the Fed is printing and dropping cash on the banks like a drunken sailor. The amounts are staggering. But it’s not going anywhere except into gov payrolls and various forms of welfare. Why? Because businesses and consumers are already up to their eyeballs in debt. The low interest rates are a symptom of this. So he lowers and lowers the rate, yet there are few takers. WE ARE IN A DEBT BUBBLE, not just a housing bubble.

    The affordability chart and the historical rate chart don’t correlate any more because of debt saturation. Back in the early 80’s most people were conservative with loans. Everybody didn’t have 6 credit cards. Mortgages were 20% down and 35% of gross income for the most part. The 30 year reduction in rates came with a reduction in lending standards. That lit the fire of bubbles. The fire burned out because nobody can take any more.

    In order to grow out of this the economy must have money supply growth. Money = debt, and I just explained why debt can’t increase. So how do we grow? Simple. Kids don’t have debt yet. And that’s just what’s happening. The banks and gov are loading up the kiddies with student loans. If this fails to light a fire in the economy, the next generation will start out with even less available credit than older folks. If this seems like burning the house down to heat yourself on a cold night — well that’s the kind of great leadership we have these days.

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  81. David Losh

    RE: Macro Investor @ 81

    In the 1980s my first house was $34K, and I was making $2K per month. At the end of the 1980s my second house was $86K and I was making $5K per month.

    That was the spike of wages, and assets in unison, of sorts.

    Today the affordability in payments seems to be all that matters.

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